Crude oil futures rise amidst rig fire, peak concerns

September 1, 2010 by Daniels Trading

Crude oil futures gained after early losses on Thursday, amidst news and reports that paint a grim picture for the supply of the world’s most vital commodity.

In the Gulf of Mexico, the Vermilion 380 oil production rig off of Vermilion Bay, Louisana exploded and caught fire, injuring one worker and causing the Coast Guard to step in and rescue the rig’s 13 workers. It’s still unknown whether the rig explosion has led to a leak; the Vermilion 380 is owned by Mariner Energy of Houston, Texas.

The explosion highlights the risk in drilling for oil off of the coast, whether in deep waters – as with BP’s catastrophic Deepwater Horizon rig explosion on the Macondo well – or in relatively shallow waters, as with this latest event. Yet dwindling reserves of “easy-to-reach” oil are forcing more and more petroleum companies to look for prospects in deep, risky locations.

Take Petrobras of Brazil, which just announced that it will pay $42.5 billion in shares to the Brazilian government for the rights to extract 5 billion barrels of undeveloped reserves off of the coast of Brazil. Although the oil will bring countless billions of dollars to the company and the nation, they are buried underneath miles of icy water and shifting salt beds, making drilling a logistical challenge.

The problems posed by dwindling oil supplies are weighing on the minds of investors and governments alike; this week, Der Spiegel Online, a German paper, published a report on secret German military documents that projected severe and radical consequences as “peak oil” comes to pass.

“Peak oil” refers to the point at which global oil production begins to decline. The decline is a permanent supply crisis in an era of surging demand for energy, and possibly devastating market and social consequences.

The Bundeswehr study predicted a realignment of international geopolitical power, further state interference in markets to secure national energy sources, market failures and even the collapse of democratic institutions in a worst-case scenario.

Although the consequences may not be that dire – in many models, peak oil occurs gradually and leads to choppy markets, price volatility or a steady adoption of renewable energy sources – the long-term picture has complex implications for crude oil futures and petroleum companies that commodity futures brokers and traders should take into account.

The price of West Texas Intermediate light, sweet crude oil futures for September delivery rose 1.453 percent today to $75 per barrel.

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This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.